Africa’s people have historically traded among themselves, informally, over time. Colonial borders later came to divide people who would consider themselves as one from way back, and who sometimes shared a common language and culture. Despite this, Africa does not trade well enough with itself. Inter-Africa trade as a share of Africa’s trade with the world is 15 per cent, compared to 60 per cent with Asia, and 70 per cent with Europe.
Barriers to good inter-African trade include tariffs and borders, large information asymmetries of trade opportunities among African nations, high frictions in African cross-border payments and logistics, alongside infrastructural inefficiencies. It is cheaper to send one kilogramme of goods to the United Kingdom from Nigeria (N29,500 by “standard courier”) than to Kenya (N40,000), even though the flight time to Nairobi, Kenya is at least one hour shorter than to London.
The same inefficiencies manifest in cross-border payments within Africa. It is cheaper and faster to receive or send payments to the UK from Nigeria than to Kenya. The Africa Continental Free Trade Area (AfCFTA) agreement seeks to promote stronger inter-African trade, which is expected to raise real income in the continent by 9% and lift 50 million people out of poverty, while being an enabler of a more prosperous Africa.
The continent has a wide diversity of 42 currencies across 50 countries, which represent significant frictions and inefficiencies for cross-border payments, given the small volume of trade, currency volatilities and different regulations across the fifty African states.
There are four broad barriers to good cross-border payments, according to the Financial Stability Board (FSB), a global organisation that monitors the stability of the financial system. They are:
1. Cost
2. Speed
3. Transparency
4. Inclusion
These barriers are manifestly amplified in Africa.
Cost: Traditional payment rails into Africa are largely designed with an assumption of Africa as a receiving continent from Europe and North America. Payment rails are largely vertical, with very little rail or non-existent rail for horizontal payments from an African nation to another.
Volatilities of currencies, the cost and risk of holding liquidity in African currencies, and the relatively small volumes of the transactions, imply that an African nation sending money to another therefore has to first exchange its currency to the dollar and then swap back to the currency of the receiving country to complete a transaction. This has been very costly to Africa, with an estimated incremental cost $5 billion per year in inter-African trade. The laudable Pan African Payment Settlement System (PAPPS), an initiative of AfCFTA, is designed to solve this problem, working with central banks in Africa.
Africa has an estimated 50 million SMEs and MSMEs, 80% of which are in Nigeria. If the SMEs and MSMEs are to participate inclusively in inter-African trade, the cost of payments must be affordable. Given the high fixed cost of payments that are crossed to the dollar in Africa and the relative small volumes of trade that the SMEs would do, it is important that payment cost as a percentage of transactions do not become a disincentive to potential inter-African trade among African SMEs.
The Financial Stability Board (FSB) has recommended a target cost of 1% of the amount transferred, with no cross-country corridor above 3%. Achieving this in Africa for the SMEs will imply a major disruption and disintermediation of the traditional cross-border payment rails that have historically served Africa, as PAPSS seeks to do along with innovative cross-border fintech players.
Speed: Payments have to travel from Africa through Europe or the US to reach another African country. This implies that cross-border payments within Africa tend to be slower using the traditional payments rails and it could take weeks to conclude a successful transaction. Direct payment flows within Africa that do not have to pass through dollar platforms outside the continent would be faster and ensure that inter-African payments get concluded within the same day of initiation.
Transparency: As fintech players innovate and solve the problem of inter-African cross-border payments, it is important that a high level of compliance with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations is adopted to build and sustain the confidence of regulators and the general public.
A key admonition of regulators to fintechs in Africa is that as we scale up and move volumes of transactions previously associated with traditional banks, we must raise our compliance standards in tandem with our size and systemic importance. It applies very significantly to fintechs in cross-border payments where there are significant AML/CFT risks, as the recent experience of West and East African corridor fintech players suggests.
Transactions charges should also be transparent and be easily understood by customers, especially the SMEs doing cross-border trade and payments for the first time, to know and manage their costs. This ensures that non-transparent charges do not become a disincentive to future cross-border payments.
Inclusion: In order to ensure that cross-border trade and payments opportunities do not leave anyone behind, especially the 50 million SMEs and MSMEs in Africa, we must ensure that everyone and every business can get on the payment rail in their home country. Without an inclusive last mile financial rail in Africa, we would not have inclusive cross-border payment as a middle mile service that connects every African business to trade opportunities outside their borders.
This last mile financial inclusion rail is the focus of OPay, to ensure that everyone, no matter their geographic situation or social location, is connected to the modern digital financial system. This is even more so important in this new cashless or limited cash era.
The user must have the options of several convenient and affordable payment and collection methods, from cards, USSD, Account to Account, QR and biometrics. Pricing and charges should recognise the larger public interests/social benefits of scaling digital payments and ensure that potential market failures are corrected where the private incentives of commercial players on the financial rail do not align well with social benefits.
So what are the more specific solutions to cross-border payment barriers in Africa? They will include the following, adapting the FSB model to Africa’s cross-border payment challenges:
1. Strong public/private partnership for smoother cross-border payments;
2. Regulation harmonisation across the 40 African countries and jurisdictions on the basis of same business, same risk and same rules principles;
3. Consistent, improved and same standards of AML/CFT rules, including information sharing amongst regulators;
4. Inclusive digital identity across Africa as the foundation stack for inclusive payments and financial inclusion that can enable every African to get on the financial rail. Nigeria has made strong progress in this area with more than 90 million citizens enrolled with the National Identity Number (NIN). The NIN enrollment base in Nigeria would cross 100 million this year 2023, which would be an historic milestone in inclusive digital identity.
The next task for financial service players and the ecosystem is to enable every Nigerian with an NIN to have a formal financial account, such that we would have more than 100 million Nigerians with either a bank account or wallet, which will be a game changer in the scale and reach of financial inclusion in the country;
5. Payments systems linkages specific to Africa and our payment currencies. The Pan African Payment Settlement Systems (PAPSS) specifically speaks to this;
6. Innovative cross-border liquidity management and disintermediation of the dollar for cross-border payments by PAPSS and cross-border fintechs. Reciprocal currency liquidity management between Central Banks, while managing potential currency volatilities;
7. Common data standards to eliminate frictions in data sharing;
8. Exploring the role of Central Bank Digital Currencies and stable coins that could potentially dis-intermediate the dollar in cross-border payments, deliver speed, while avoiding volatilities associated with unregulated digital currencies.
Conclusion
The vision of Afrexim, its African governments and institutional shareholders to birth AfCFTA and PAPSS is very commendable.
Working with private sector financial service players and fintechs, Africa can build an inclusive network of coordinated financial rails that link Africa end-to-end across borders to trade. It would birth a more inclusive and shared prosperity in Africa, where no-one’s geographic location or social situation prevents them from being partakers of a new more prosperous and economically-integrated Africa.
***Olu Akanmu is president and co-CEO, OPay-Nigeria.*
